How John Lewis has weathered the high street storm

It may not be on the scale of a bankers’ bonus but with an anticipated pay-out
of around £200m between them – about 15pc of each staff members’ annual
salary – John Lewis' bonus will certainly be celebrated.

John Lewis Partnership’s staff will be enjoying the fruits of a rare good news story from the British high street.Photo: Geoff Pugh

Early on Thursday morning workers at John Lewis and Waitrose stores around the country will excitedly open neat white envelopes and read out the much anticipated bonus figure to their 87,000 colleagues.

It may not be on the scale of a bankers’ bonus but with an anticipated pay-out of around £200m between them – about 15pc of each staff members’ annual salary – it will certainly be celebrated. As shop workers in rival stores face an uncertain future, the John Lewis Partnership’s staff will be enjoying the fruits of a rare good news story from the British high street.

In the face of persistent economic head winds, Waitrose has been growing at twice the rate of its major supermarket rivals while its sister John Lewis department stores are a constant nail in the shoe of rival Marks & Spencer, which is losing market share as the partnership strides confidently on.

John Lewis is expected to reveal a 17pc rise in profits to £415m after a 10pc rise in sales to £8.5bn for the year to January.

Of course, part of the reason John Lewis has been sheltered from the storm raging elsewhere is because its slightly older and more affluent customers have been relatively insulated from the income squeeze experienced by others. The downturn has not affected everybody and those who are in secure employment have found the cost of their debts falling.

But, the economic background of its customers is not the most important thing driving the John Lewis phenomenon. Once a fusty old business with the culture and appeal of the civil service, the partnership has turned itself into an online powerhouse unafraid to try the latest ideas.

The company, which shares a proportion of its profits with staff every year, is investing in the latest online technology and new concepts such as a drive-through facility for collecting groceries ordered on line as well as ensuring its department stores look good enough to host up-market beauty brands alongside its traditional home, electricals and fashion ranges.

Mark Price, the managing director of Waitrose, and Andy Street, the managing director of John Lewis, seem to compete in their efforts to drive the business forward with innovative ideas.

As a result, Waitrose has increased its share of the grocery market by 8.9pc to nearly 5pc in the past year. Price has opened a wave of Little Waitrose convenience stores and taken the chain’s online service to a much wider market.

He has also kept in tune with shoppers concerns about cost by matching Tesco’s prices on branded items and introducing the cheaper Essentials range which is now worth £1bn in sales a year.

At John Lewis, Street is also experimenting with smaller formats, the latest of which was a 65,000sq ft store in Exeter which is less than half the average 135,000sq ft of its main outlets. It is also building a closer relationship between its website and the high street stores by allowing shoppers to pick up goods ordered online at a local department store or, from later this year, via a network of thousands of convenience stores and garages in the Collect+ network.

Both chains have also been boosted by allowing shoppers to pick up goods ordered at John Lewis’s online store at a local Waitrose. To date, 43pc of John Lewis click-and-collect orders are picked up in a Waitrose shop.

“John Lewis is benefiting from the investments it made in online a long time ago,” says Maureen Hinton, director of research at retail analysts, Verdict.

While Marks & Spencer is still hobbled with a uninspiring website built for it by e-tail giant Amazon under a deal signed several years ago, John Lewis opted to acquire a small operator, Buy.com, in 2001 and used the company’s knowledge and systems to help tailor John Lewis’s online store exactly to its shoppers needs. Having enjoyed a 30pc rise in online sales in the past year, it is about to launch another updated version of the site which will allow better communication with stores and shoppers.

Waitrose, meanwhile, invested in the Ocado home delivery service which launched in 2000. It was a ground-breaking investment but the contract was structured so that the partnership was able to sell down its stake in the online business over time and develop its own separate store-based service alongside.

The supermarket benefited from a jump-start to its online ambitions via its arms-length partner and then learned from that experience to mould its own service.

Those developments online underline the real key to the John Lewis Partnership’s success. It understands its customers and so is able to build its business around their needs and desires according to Richard Hyman, an adviser to the PatelMiller retail consultancy.

He says the company engenders great trust in shoppers, partly because of its focus on quality, partly because of its guarantee that it is “never knowingly undersold”. Its long-term warrantees, advice and reliability also helped it hoover up sales of hi-tech gadgets when specialist electrical store Comet went into administration.

“There is no market growth at the moment so losing marking share is life threatening. This situation has magnified the fundamental strengths right the way through the partnership which are mostly around its relationship with the customer,” says Hyman.

The partnership structure was once seen as a great drag on the business, preventing the company making the dynamic decisions needed to compete in a modern marketplace.

It has now been tweaked so that the business can move more swiftly but with the benefit of checks and balances on manage-ment excess via the shop floor.

The partnership also fuels the “feel-good” factor for shoppers who know that the money they spend will benefit workers.

Of course, none of that would make much difference if Waitrose and its sister department stores didn’t stock desirable goods.

While John Lewis has undoubtedly benefited from booming sales of new technology in the past year, particularly tablet computers, it has also seen a dramatic rise in sales of clothing.

That is because, where others have stumbled, it has worked hard to bring in new interesting brands and develop its own labels from Kin to the highly popular Somerset by Alice Temperley. Those developments have increased John Lewis’s appeal to a younger shopper. Getting that balance right has helped steal market share, particularly from Marks & Spencer.

John Lewis is estimated to control 24.3pc of the department store sector, up from 19.5pc in 2008. During the same period, Marks & Spencer has seen its share dip from 31.7pc to 28.6pc, a near-10pc fall according to Verdict’s recent Department Store Retailing in the UK report. Hinton says: “M&S could look at John Lewis and learn the importance of really strong brands.”

She also thinks John Lewis has benefited from a stable management team, and its use of external brands which are easier to bring in and throw out to suit shoppers’ changing habits. Its broader range of products have also helped during the downturn, making it less reliant on fashion than some high street rivals.

Ironically, M&S decided to move out of selling technology products in 2010, so missing out on the stellar growth in demand for gadgets which helped draw shoppers into John Lewis last year.

M&S isn’t the only retailer that could take some lessons from the partnership.

Waitrose’s focus on home-grown produce and quality keys into shoppers’ growing interest in the provenance of their food which has only accelerated in the wake of the horse-meat scandal. As cheaper rivals, such as Tesco and Asda, have discovered some nasty surprises in their supply chain, Waitrose has remained largely unscathed.

Tesco is now talking about sourcing more food in the UK and simplifying its supply chain and others are sure to follow Waitrose’s lead.

Edward Garner from market analysts, Kantar Worldpanel, says: “Generally there is a movement of people who think there is more to life than cheap food. For them the cost of shopping at Waitrose is not that much more expensive than going elsewhere.”

Price is clearly keen to capitalise on that demand. He has said the chain could more than double in size, from 290 shops now to as many as 600 over time. This year Waitrose is set to open 20 new branches – half of which will be convenience stores in London.

Garner says the upmarket grocer still has plenty of opportunity for expansion, particularly in Scotland, where it has less than 1pc market share, as well as in Yorkshire and Lancashire. He believes doubling its market share would be rather optimistic, however: “There will come a point where it will grow beyond its niche. It is not a mass market operation.”

Waitrose’s higher operational costs also mean it must be careful about its investment in stores as more shoppers choose to buy groceries online. Price believes Waitrose could double the proportion of internet sales to 6pc by the end of decade. Could it still offer the same level of service in stores if that happens?

John Lewis is facing the same problem. It is not planning any new stores in 2013 but will invest £57m in refurbishing existing stores including Oxford Street, High Wycombe, Kingston, Surrey, and Nottingham. Next year it will open a full-line depart-ment store in Birmingham with others planned for Ashford, York, Leeds and Chelmsford in the future.

Its expansion plans are in sharp contrast to rival businesses which are cutting back their store portfolio as the move online makes a high street presence unprofitable in many areas. “They have got to make sure they get a return on investment,” says Nick Bubb, an independent retail analyst who follows John Lewis closely.

“They need to be careful about costs in the branches particularly when the boom in tablet computers dies away.”

He points out that, although John Lewis continues to see underlying sales growth in its high street stores as well as online, much of that has been driven by electrical gadgets which are not very profitable.

That followed the departure of 700 in-store call-centre employees in 2009, while 300 store jobs involved in training and supporting colleagues are in discussion.

John Lewis says it hopes many of those staff will be found jobs elsewhere, but further jobs are likely to go when the department store relocates its distribution centre from Park Royal in West London, which employs 560, to Magna Park in Milton Keynes to be run by 450 staff.

Keeping costs down may be a sensible business move but cutting too hard may risk damaging the ethos of the partnership and its reputation for service.

“The business is now more pragmatic. Many things, such as outsourcing and cost management would not have been countenanced a number of years ago,” says Hyman. “It’s possible that some of that pragmatism has gone too far but it’s too early to tell.”

The race to open more space at both Waitrose and John Lewis may also put their famous customer service under strain. “Training the staff and making sure the culture continues is difficult when you are opening new space and that is what really differentiates them,” says Hinton. There is no doubt it has been a remarkable year for the John Lewis Partnership. Its greatest challenge will be keeping that momentum going, staff bonuses included.